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Construction case law update: January 2014

 

By Sri Carmichael


Finesse Group Ltd v Bryson Products (A Firm) [2013] EWHC 3273 (TCC)

Keywords

Case management – Costs budgets

Synopsis

The court effectively forced both parties to reduce their costs budgets substantially or face the imposition of fixed proportionate costs. The court also permitted a claim worth less than £250,000 to be heard in the High Court TCC in London.

Facts

At the first case management conference in the TCC, Akenhead J told both parties’ solicitors to give serious thought to making large cuts to their costs budgets before the issue of costs management was dealt with at the next hearing. The judge suggested a “sensible and imaginative solution” to reduce costs could be expert sharing. 

Each side’s costs budget stood at around £200,000, together dwarfing the sum of £170,000 that was in issue. The judge warned the parties that if their costs budgets remained so high, it was likely the court would have to assess and fix proportionate budgets – and the difference between the parties’ costs and the maximum they were allowed might then be so large that it would make pursuing the litigation uneconomic.

Akenhead J also ruled that the case could be heard in the High Court despite the guidance in West Country Renovations Ltd v McDowell [2012] EWHC 307 (TCC) that claims for less than £250,000 should generally be commenced in a county court or High Court centre outside London with a TCC judge. The judge noted that the guidance contained a “test case” exemption, which he considered this case fell within. Nevertheless, Akenhead J emphasised that the High Court TCC was not encouraging applications from parties in low value claims for transfer to London.

Comment

In relation to the costs point, the parties were probably fortunate that the court could not deal with costs management at the same hearing - otherwise their costs might well have been capped.

SABIC UK Petrochemicals Limited v Punj Lloyd Limited [2013] EWHC 2916 (TCC)

Keywords

Due diligence – Termination

Synopsis

The decision provides helpful guidance on due diligence obligations. Their breach can often provide and exit route out of construction contracts by triggering termination.

Facts

C engaged a contractor that was part of the group of companies owned by D to design and construct a plastics processing plant. The project ran into difficulties and C terminated its contract with D on the basis that it had allegedly failed to proceed with due diligence. C sued D for £26.5 million, covering the claimed cost of completing the project and losses arising from delayed production at the plant (together with interest). D disputed C’s right to terminate and counterclaimed.

Held

C was awarded £11.8 million. Although the judgment turned on its facts, the court considered legal and practical issues with potentially wider relevance to construction contracts, among them the relationship between a contractor's due diligence obligation and a completion deadline.

The court considered the scope of the due diligence obligation and the extent to which D’s due diligence could be judged by reference to its progress towards achieving a certain outcome in the project. D said achieving the outcome was impossible so the requirement of due diligence could not be judged against it.

The contractor argued that the EID was irrelevant because achieving the EID was impossible and the requirement of due diligence could not require it to achieve the impossible. In considering this argument, the court referred to: Greater London Council v Cleveland Bridge and Engineering [1984] 34 BLR 50; West Faulkner v London Borough of Newham (1994) 71 BLR 1; and Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2012] EWHC 1280 (Ch).

After examining these authorities, the court held that due diligence meant carrying out works "industriously, assiduously, efficiently and expeditiously". However, whether that requirement was satisfied depended on the obligation to which it attached in any particular case. Moreover, while the obligation to exercise due diligence did not give rise to an absolute contractual duty to achieve a particular outcome, the due diligence obligation did not become less onerous just because the outcome became impossible. Therefore a target that was impossible to achieve was still relevant.

Comment

The judgment demonstrates that a completion deadline is often relevant, although the precise context will determine how significant it is.

Parkwood Leisure Ltd v Laing O’Rourke Wales & West Ltd [2013] EWHC 2665

Keywords

Collateral warranty – Housing Grants, Construction and Regeneration Act 1996

Synopsis

The TCC considered for the first time whether a collateral warranty is a “construction contract” for the purposes of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”)

Facts

D (the contractor) had entered into a building contract to undertake construction work on a leisure facility operated by C.

A deed was executed between C and D before the works were completed whereby D gave certain warranties, acknowledgements and undertakings to C. These included that D had and would carry out and complete the works in accordance with the main contract, and that in the event of any breach of the warranty, D would be liable for the reasonable cost of repair, renewal and/or reinstatement of any part of the works to the extent that it had incurred such costs and/or was liable for such costs.

C later complained about certain construction defects by D. C subsequently wrote what was said to be a pre-action protocol letter to D seeking to enforce its right to damages under the collateral warranty.

C argued that the warranty constituted a construction contract under s104(1) of the Act on the basis that it contained D’s express agreement to carry out construction work.

Held

Whether the collateral warranty constituted a “construction contract” under s104(1)  for the carrying out of construction work, the arranging of others to carry out construction work or the provision of labour to carry out construction work had to be determined primarily by reference to the agreement entered into between the parties.

Ordinary contractual interpretation principles then had to be applied to determine that aspect of the contract. A contract is not barred from being a construction contract by the fact that it is retrospective in effect, as it is common in construction for contracts to be finalised after the works have started. Moreover, it is clear that Parliament had intended for s.104(1) to have a wide definition. An agreement "for the carrying out of construction operations" was a broad expression.

In the instant case, there was no doubt that the wording used by the parties meant that the collateral warranty was and was to be treated as a construction contract for the carrying out of construction operations. However, it did not follow that all collateral warranties given in connection with all construction developments would be construction contracts under the Act. In each case the factual background of the warranty had to be considered.

A collateral warrant was most likely to be a construction contract where the contractor was undertaking to the beneficiary of the warranty to carry out such operations. A factor that would point against a warranty being such a contract could be that all the works have been completed and that the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.

C was entitled to a declaration that the collateral warranty was a construction contract for the purposes of the Act.

Comment

The case may open the door to an increase in claims under collateral warranties being referred to adjudication (previously the parties had to resort to court litigation or, more rarely, arbitration). Beneficiaries of collateral warranties may welcome this potentially money-saving change in the law, but is less likely to be welcomed by the contractors and sub-contractors who routinely provide such warranties.

The possible rise in adjudication of this issue raised practical issues. Adjudication is ill-suited to situations where there are multiple parties all in receipt of collateral warranties from the contractor, as it does not provide a forum for multi-party litigation and is only binding in the interim on the parties involved, while not being binding on other parties in the contractual structure.

Genesis Housing Association Ltd v Liberty Syndicate Management Ltd (2013) EWCA Civ 1173   

Keywords

Insurance contract – Breach of warranty

Synopsis

The Court of Appeal ruled that a "basis of contract" clause in an insurance proposal form constituted a warranty even though the insurance policy made no reference to the form.

Facts

The appellant housing association, A, appealed against a decision that it could not recover under its insurance policy with the respondent insurers, R.
A had employed a property development company to construct a housing development. The developer, acting as an agent for A, sought insurance from R. The developer’s representative signed a proposal form which wrongly identified the builder as another in the developer’s group. The proposal form included a declaration that the information in the proposal was correct to the best of the knowledge and belief of the insured. The declaration also stated that the proposal formed the basis of the insurance contract.

One condition of the policy stated that it would be "voidable in the event of misrepresentation, misdescription, error, omission or non-disclosure by the Policyholder with intention to defraud".

The developer went into administration during the construction work. A suffered financial loss and sought an indemnity from R.

The judge held that the statement of the identity of the builder in the proposal form was a warranty with contractual effect and that A could not recover under the policy because it was in breach of warranty.

A argued that the judge had erred in holding that the statements in the proposal form were warranties, since the policy had set out a comprehensive list of the documents comprising the policy, and that list had not included the proposal form. Further A argued that the judge had erred in holding that A had warranted as to who was to be the builder, since the declaration had stated not that the statements in the form were true, but that they were true to the best of the knowledge and belief of the insured, and the error in the form had been inadvertent. Lastly, A argued that condition 7 of the policy had to restrict R’s right to avoid for misstatement to circumstances where there was intent to defraud, since otherwise it added nothing to the terms of the policy.

Held

The appeal was dismissed.

It was held that where a proposal form contained a "basis of contract" clause, the proposal form had contractual effect even if the policy contained no reference to the form, and all statements in the form constituted warranties on which the insurance contract was based.

That principle could be displaced by express words in the policy. It could not be displaced merely by omitting the form from the list of contractual documents. Only clear and unequivocal language would deprive a form purporting to be the basis of the contract between the parties from contractual effect.

Further, A and the developer had known that the developer would be the builder. The statement in the proposal form was contrary to what A had known to be the case. Moreover, the two parts of the declaration were independent of each other: the first did not qualify the second. The "basis of contract" clause could not be read down so as to mean that a misstatement had no effect if the proposer was unaware of the error.

Lastly, condition 7 was not expressed to be a limiting provision. It did not say that the policy would be voidable only in the circumstances that it mentioned. It was highly unlikely that the parties would have agreed to curtail the insurers' normal right of redress to such an extent, and if they had intended to achieve such an unusual result, they would have said so expressly.

The misstatement in the proposal form meant the policy was void.

Comment

The decision provides a reminder of the importance of checking the accuracy of answers given in proposal forms containing a basis of contract clause.


By Brenna Conroy


Roe Brickwork Limited v Wates Construction Limited [2013] EWHC 3417 (TCC)

The Issue

Whether an adjudicator had jurisdiction to assess a claim for loss of overheads and profit in the way that he did; alternatively whether the adjudicator breached the rules of natural justice in failing to allow the parties an opportunity to make submissions on the method he adopted in calculating the loss.

The Facts

This was an application by the Claimant for summary judgment to enforce the decision of an adjudicator. The Claimant was a brickwork subcontractor for the construction of three blocks of flats on the Ocean Estate in Tower Hamlets, East London. The Defendant was the main contractor.

The Claimant's claim in the adjudication was that its work had been delayed by about six months and that, as a result, it had suffered significant loss and expense. The claim included, inter alia, the following three heads of claim:

i) Additional preliminaries and loss of overheads and profit (“OHP”);
ii) Loss of productivity; and
iii) Additional supervision and management.

The claim for OHP was calculated using the “Hudson formula”, which involved a calculation of the contractor's OHP as a percentage of turnover based on a fair historical average. This was then multiplied by the contract sum and the period of delay and divided by the contract period.

The adjudicator did not decide that a particular sum was due to the Claimant, but rather assessed the value of the claims referred to him and awarded a total sum. In relation to the claim for OHP, the adjudicator calculated his by increasing the amounts awarded in respect of the other heads of loss by 13% rather than adopting the method in the Claimant's claim.

The Defendant resisted the application on two grounds. Firstly, that the adjudicator did not have jurisdiction to assess the OHP in the way that he did; alternatively that to adopt the approach he did without allowing the parties an opportunity to make submissions on it was a breach of natural justice which had a significant or material impact on his finding as to the value of the claim.

Secondly, the Defendant argued that the adjudicator's decision lacked certainty on the basis that he made no findings about the sums that had been paid by the Defendant under each head of claim, and since these were not agreed, there was no way of knowing what amount is due from the Defendant to the Claimant in consequence of the Decision. On this basis the decision was unenforceable.

Held

Edwards-Stuart J

The Court held that the adjudicator neither exceeded his jurisdiction nor acted in breach of the rules of natural justice. Whilst the adjudicator did not produce a calculation that was consistent with the approach that had been adopted by the Claimant, his methodology differed in only one minor respect in that he applied the 13% uplift for OHP to the figure representing the total loss of productivity, rather than to the figure arrived at by multiplying the weekly value of the total contract by the number of weeks extension of time following the Hudson formula. Furthermore his figure of 13% was derived from material put forward by the Claimant.

The Judge commented, obiter, that even if the adjudicator had breached the rules of natural justice, it had no effect on the quantum of the claim that was adverse to the Defendant's position. Accordingly, the breach, if there was one, was not a material breach.

The Court rejected the Defendant's second ground of challenge on the basis that by the time of the application for summary judgment the Defendant had accepted that no more than £97,992.23 had been paid on account of the claims. In those circumstances, there was no remaining dispute between the parties that the sum arrived at by the adjudicator, less the £97,992.23 paid by the Defendant, was due to the Claimant as a consequence of the adjudicator's Decision.

BMG (Mansfield) Ltd v Galliford Try Construction Ltd [2013] EWHC 3468 (TCC)

The Issue

Where there were concerns about "expert shopping", whether it should be usual practice for the court to order disclosure of all the retiring expert's reports as a condition of calling fresh expert evidence.

The Facts

The Claimants were the owners of a shopping centre which suffered a serious fire on 28 October 2004. The Claimants' case was that as a result of inadequate fire protection in the roof space and eaves canopies of the centre, the spread of the fire and consequent damage was far more extensive than it should have been. Galliford was a design and build contractor, and the Second Defendants (“the architects”) were engaged by Galliford to perform its design obligations.

This was an application by the Claimants for permission to call expert evidence from a fresh expert architect. The original architect was instructed shortly after the fire and was aged 61 or 62 at the time; following a mediation in 2012, the expert informed the Claimants that he wanted to retire.

The Defendants accused the Claimants of "expert shopping", or at least the appearance of expert shopping, and requested, as a condition for permission to call a new expert, disclosure of all undisclosed expert reports, and any communications from the Claimant's original expert to instructing solicitors containing his opinion on the issues in the litigation.

Held

Edwards-Stuart J

The Court held that there was nothing unreasonable about an expert who, approaching his seventieth birthday, wanted to be relieved of his duties as an expert in litigation that he could reasonably have expected to have been concluded some years earlier and which had no immediate end in sight.

The Judge accepted that the conditions that the court can impose on a party applying for permission to call an expert are not limited to an expert's “final” report (meaning the report prepared for disclosure pursuant to CPR 35 ), but may extend to other reports containing the substance of the expert's opinion.

In respect of ordering the disclosure of solicitors' attendance notes, the Judge stated that there were a number of considerations in respect of such communications that lead him to conclude that there would have to be a very strong case to justify a condition that such documents should be disclosed in addition to any reports or draft reports by the expert. In particular, that there was a danger that the attendance notes would not record the expert's actual words, but rather the substance of what the solicitor understood the expert to say, and that the notes may well contain material that is not expert opinion

The Court found that this was not a strong case of “expert shopping”, and was not prepared to order disclosure of all attendance notes. The Judge did,however, order the Claimants to disclose any other report or document provided by the experts in which he expressed opinions or indicated the substance of such opinions on the matters in issue in these proceedings.

Pioneer Cladding Ltd v John Graham Construction Ltd [2013] EWHC 2954

The Issue

Whether the Court would grant a stay of execution of an adjudicator's award pending an ongoing arbitration and whether the requirement to pay the adjudication sum into an escrow account was contrary to the Housing Grants, Construction and Regeneration Act 1996 and to general adjudication principles.

The Facts

Pursuant to a sub-contract made in about June 2011, the Defendant instructed the Claimant to carry out the cladding and curtain walling sub-contract works at a site in South Shields. The sub-contract incorporated the Defendant's standard terms and conditions. Clause 21 set out the dispute resolution provisions which provided that in the event that the decision of the adjudicator is the making of a monetary award in favour of the Sub-Contractor, the Defendant was required to pay the adjudication sum into an escrow account. A further sub-paragraph of the clause also stated that the adjudicator's fees are to be borne by the Party which refers the dispute to adjudication.

Following an adjudication award in its favour, the Claimant claimed its entitlement to the sum as opposed to the sum being paid into the escrow account; the Claimant argued that the provision is contrary to theHousing Grants, Construction and Regeneration Act 1996 and contrary to the principles behind the entire adjudication process, which is ‘to pay now, argue later’.

Held

Coulson J

The Court held that there was no doubt that the clause was in breach of both the policy behind the 1996 Act and the Act itself on the basis that it would deprive a claiming party of the money they had been awarded by the adjudicator. The clause was therefore designed to discourage a party from exercising its right to take disputes to adjudication. In line with the decisions in Yuanda (UK) Limited v WW Gear Construction Limited [2010] PLR 435 and Sprunt Limited v London Borough of Camden [2012] BLR 83 , such a clause was unlawful and cannot be enforced (the claim made under the 1996 Act and not Local Democracy, Economic Development and Construction Act 2009).

The Judge also held that the clause stating that the adjudicator's fees are to be borne by the Party which refers the dispute to adjudication was also contrary to the 1996 Act on the basis that it also discouraged a claiming party from commencing adjudication and was therefore unlawful.

In relation to the application to stay the execution of the adjudicator's award, the Court applied the principles in Wimbledon Construction Co 2000 Ltd v Vago [2005] EWHC 1086 (TCC), [2005] B.L.R. 374 and held that the requirements set out in the case were satisfied: the instant case was one of those rare occasions where the company in whose favour the award had been made was financially unstable and would not be able to repay the award if required by the outcome of the ongoing arbitration.

National Museums and Galleries on Merseyside Board of Trustees v AEW Architects and Designers Ltd [2013] EWHC 3025 (TCC)

The Issue

Whether a claim for damages for breach of contract for failure to exercise reasonable care and skill was a claim for a debt to which the Late Payment of Commercial Debts (Interest) Act 1998 applied. Whether the Defendant's conduct justified payment of costs on an indemnity basis. Whether any interim payment on account of costs should take into account the impact of a CFA between the Claimant and its solicitors. Whether any interim payment should reflect a costs management order made in April 2012.

The Facts

The court was required to determine issues relating to interest and costs following judgments on liability ([2013] EWHC 2403 (TCC)) and quantum ([2013] EWHC 2576 (TCC)) in a claim for tortuous and/or contractual damages brought by the claimant museum against the defendant architects.

The Court had to determine four issues:  the first being whether a claim for damages for breach of contract for failure to exercise reasonable care and skill was a claim for a debt to which the Late Payment of Commercial Debts (Interest) Act 1998 applied. The second whether and upon what basis (indemnity or standard) the Claimant should be awarded all its costs. The third being whether any interim payment on account of costs should take into account the impact of the CFA between the Claimant and its solicitors and fourthly whether such interim payment should reflect the cost management order made in April 2012 or the later costs management budget schedules submitted for the Pre-Trial Review.

Held

Akenhead J

The Court held that the Late Payment of Commercial Debts (Interest) Act 1998 did not apply to a claim for damages for the Defendant's failure to exercise reasonable care and skill. The Judge stated that the 1998 Act specifically identified "debt" only as attracting the specific interest provisions, with a "qualifying" debt being an obligation under a contract to which this Act applies to pay the whole or any part of the contract price. There was a very clear distinction to be drawn between the payment of the contract price and any liability for damages for breach of contract because the latter would not usually arise as pursuant to an obligation to pay the contract price. In the case of a claim for breach of contract for (unliquidated) damages, that claimed entitlement will only convert into a debt as a result of a judgment or arbitration award; it does not become a debt until that stage and at that stage it attracts the specified judgment rate of interest for late payment of a judgment sum.

In relation to the Claimant's claim for costs assessed on the indemnity basis, the Judge stated that whilst the Defendant had failed to explain why it had admitted some aspects of liability only a few working days before the beginning of the trial, the Claimant had been late in appointing an expert quantity surveyor and in providing a further statement by one of its witnesses days before trial. On the basis that concerns as to the Defendant's failures were balanced by concerns in relation to Claimant's late appointment of its expert and the belated production of the witness statement statement. It was therefore fair and reasonable to award the Claimant all its costs, but on a standard basis.

In relation to the approved costs budget of £492,727, the Judge held that there was justification to increase the budget to at least £1 million in view of subsequent matters, including the joinder of a third party, substantial amendments to the Claimant's case relating to quantum, the increasing complexity of the case and disclosure disputes. The revised budget therefore formed an appropriate basis against which to assess the interim payment of costs.

In respect of the Defendant's challenge to the enforceability of the Claimant's CFA, the Judge held that it was likely to be broadly enforceable but refused to assess any interim payment on account by reference to the Claimant's possible success on the issue. The Judge determined that the issue regarding the enforceability of the CFA would be dealt with by the costs judge.